Tension between China and Australia escalated yesterday as the Chinese State Security Bureau stepped up its investigation into alleged spying by Rio Tinto staff when it questioned executives at leading Chinese steel mills.

Officials at mills owned by Baosteel, Anshan Iron and Steel and Shougang Group were questioned about information that may have been given to Rio Tinto.

It is the latest development in a Chinese investigation into the alleged theft of state secrets and follows the arrest of four Rio staff in Shanghai this month, including Stern Hu, an Australian of Chinese descent, and the company’s chief iron ore negotiator. Mr Hu and his three Chinese colleagues have been accused of bribing officials to secure secret information about the negotiating position of the China Iron and Steel Association (CISA) in talks with Rio Tinto over iron ore contract pricing.

CISA had taken over the negotiations from Baosteel in an effort to exert pressure on Rio for cheaper iron ore. However, the two sides failed to agree a price by the deadline of June 30, leaving Chinese iron ore importers uncertain about future pricing. The spying row has left the annual contract negotiations in limbo.

The investigation has not only put the multi-billion dollar trade in iron ore between Australia and China at risk but is also threatening a diplomatic rift between the two countries.

Kevin Rudd, the Australian Prime Minister, said yesterday that efforts to secure the release of Mr Hu took priority over trade relations between the two countries.

Mr Rudd has insisted that the wellbeing of Mr Hu was his prime concern. “Australia’s national interest always and under every circumstance comes first. That means the wellbeing of any Australian citizen. They come first,” he said.

The arrests have provoked media outrage in Australia and Mr Rudd, a former Beijing diplomat, is under intense pressure to show his displeasure towards the Chinese leadership.

The incident is widely seen as an act of revenge over China’s failure to secure control over Rio’s iron ore business when negotiations between Chinalco and Rio Tinto over a large investment in the Anglo-Australian miner collapsed this year.

However, Chinese internal politics may be as significant as the failed investment in Rio. China’s fragmented steel industry is utterly dependent on imports and struggles for leverage in negotiations with the iron trading triumvirate of Rio, BHP Billiton and Vale of Brazil.

Meanwhile, the Chinese Government is preparing to crack down on alleged speculation by iron ore importers with the cancellation of 20 import licences.

More than 100 iron and steel enterprises are licensed to import ore, but in an effort to exert control, CISA is expected to consolidate the import business among state-owned trading houses, cutting out the private sector.

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